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The Keystone XL and the US Oil Export Ban

UPDATE: The 40-year-old US oil export ban was lifted on December 16, 2015. More..

For the Canadians, the Keystone XL has been an interesting regulatory waltz.

Those old enough to remember the gas station lines of the 1970’s may recall the economic disruption caused by OPEC’s oil embargo over 40 years ago. In response, Congress passed the Oil Export Ban which brought energy security to America by insuring that oil produced in America stayed in America – with the exception of that oil exported to Canada.

Currently, with Mexican heavy crude production dropping, Mexican exports to Gulf Coast refineries has fallen. The Keystone XL pipeline compensates for the diminished Mexican supply by delivering Canadian diluted bitumen from the Alberta Tar Sands. Since the Jones Act requires that goods transported between US ports be carried on US-flagged ships staffed and owned by US citizen, it is cheaper for the Canadians to ship the refined oil back to Canada on non-US carriers. From there, the refined petroleum is available to world markets where it will fetch the highest price. The round trip makes the costly-to-extract tar sands oil competitive in a tight global market.

So while the Keystone XL has been billed as a jobs program and a safe oil supply for energy thirsty America, the pipeline allows foreign (Canadian) oil to be refined in the US where it can then be shipped to foreign markets (via Canada using non-US labor).

Things got dicey for the costly Canadian oil in December when OPEC refused to limit their oil production, crashing the world price of oil in an effort to drive the heavy grades of oil from Mexico, Venezuela, and Canada out of the market.

Meanwhile, on American soil (where the Keystone XL is projected to increase oil prices in the Midwest by relieving delivery bottlenecks and, thus, open the area to market-priced oil) the OPEC play has resulted in cheap gas and tighter production margins nationwide. In the end, it may be the market, and not climate concerns, that kills the Keystone.

Oddly, though, it was Citicorp who lifted North Dakota and Gulf Coast shale oil producers (aka frackers) from this Christmas season OPEC-induced funk when they made a little-noticed New Year’s Eve announcement stating that the Obama Administration’s Commerce Department would allow ultralight crude exporters to sidestep the export ban. Why the White House didn’t make the announcement themselves is unknown but, evidently, with a shale oil glut on the horizon, the drilling boom may be coming to an end unless other markets can be found.

Masked by the OPEC’s low prices is that the costly extraction of tar sands and shale oil is a clear indication that we’ve reached the end of cheap, easy oil. If energy security is truly an American priority, the export ban is more pertinent today than 40 years ago.